"Activity in the services sector rebounded in January at the fastest pace since July 2011 led by the financial intermediation and hotels and restaurant sub-sectors, and new business also flowed in at a faster pace," said Leif Eskesen, chief economist for India and ASEAN at HSBC.

However, according to the survey inflation was still high and it would be premature for the Reserve Bank to cut key policy rates. "Prices charged continued to accelerate. Combined with the uptick in the manufacturing PMI, these numbers suggest it's premature for the RBI to cut policy rates and that it would have to await evidence of a significant and sustained decline in inflation or further materialization of downside risks to growth," said Eskesen.

The RBI had raised key rates 13 times since March 2010, resulting in short-term borrowing rates for banks going up by a cumulative 350 basis points. Last week, it cut the cash reserve ratio by 50 bps to ease liquidity while announcing that its focus would now turn towards aiding growth.

According to the HSBC survey, based on responses from around 350 private companies, the increase in demand due to improving global conditions led to a rise in the pace of new orders coming into the service sector. The new business index surged to 58.2 in January from 55.7 in the previous month.

Private service providers were confident that business activity would increase over the next year. "Growth is expected to be supported by improving market conditions and a rise in promotional activity," the survey said.

The degree of positive sentiment was also at its highest since July 2011, with the relevant index posting its largest one-month gain in seven months.

Overall, the HSBC composite PMI index, which includes manufacturing and services, rose fastest in nine months to 59.6 from 54.7 in December.